SUMMARY

The recent Queensland Supreme Court decision of St George
Bank Limited v Perpetual Nominees Limited & Anor [2010]
QSC 57 clarifies the position of a first mortgagee exercising a
power of sale over personal property. It has long been established
that a first mortgagee, in exercising a power of sale over land,
may convey the land free of the interests of any subsequent
mortgagees. This case clarifies that the position of a first
chargee exercising its power of sale over personal property
(secured by a charge over the assets and undertakings of a company)
is the same.

This case has important implications for financiers pending the
commencement of the Personal Property Securities Act 2009
(Cth) due to commence in May 2011.

THE FACTS

On 27 June 2006, St George Bank Limited (St
George) agreed to lend Desmarest Pty Ltd
(Desmarest) $78m to purchase the Sheraton Mirage
Hotel on the Gold Coast (Hotel) and took various
securities to secure its loan. SP Hotel Investments Pty Ltd
(SP Hotel) became the owner and operator of the
Hotel.

Perpetual Nominees Limited (Perpetual) and LJK
Nominees Pty Ltd (LJK), on subsequent days to the
St George loan, lent further money and took further securities.

The three lenders took the following securities:

St George took:

an unlimited guarantee and indemnity given by SP Hotel;

first registered mortgages over SP Hotel's interest in the
land;

a first registered fixed and floating charge over the assets
and undertakings of SP Hotel; and

a deed of cross-collateralisation between St George, Desmarest
and the guarantors (including SP Hotel).

Perpetual took:

second registered mortgages over SP Hotel's interest in the
land; and

a second registered fixed and floating charge over the assets
and undertakings of SP Hotel.

LJK took:

third registered mortgages over SP Hotel's interest in the
land; and

a third registered fixed and floating charge over the assets
and undertakings of SP Hotel.

St George and Perpetual also entered into a priority deed
whereby St George had priority up to $78 million.

Desmarest and SP Hotel subsequently
defaulted on the St George loan which eventually led St George to
appoint receivers and managers to SP Hotel.

The receivers entered into contracts to
sell the Hotel (comprising the land, assets and undertakings of SP
Hotel) to Pearls Australasia Mirage 1 Pty Ltd
(Purchaser). On 23 November 2009, these contracts
were rescinded and replaced with new contracts, relevantly on the
same terms with the Purchaser in St George's name but with the
addition of a clause making it clear that the sale was being made
pursuant to the exercise by St George of its power of sale. (If the
contracts had remained as a sale by the receivers this would have
meant that SP Hotel was the vendor and therefore the sale would be
subject to all outstanding charges over the property. A sale by St
George, however, would be an exercise of the mortgagee's power of
sale and arguably not subject to Perpetual and LJK's
securities.)

Perpetual and LJK were notified that the proceeds of St George's
sale to the Purchaser, for $62 million, would be insufficient to
result in any funds being available to them. As a result, Perpetual
and LJK refused to release their charges over the Hotel.

St George applied to the Supreme Court for a declaration that
upon the sale of the property, the Purchaser would take the
property free of any security interests held by Perpetual and LJK.
Alternatively, St George sought an order for the judicial sale of
the property and undertaking of SP Hotel pursuant to section 99
Property Law Act 1974 (Qld) or the court's inherent
jurisdiction.

THE LITIGATION - THE CENTRAL ISSUE:

The central issue for the court was whether, in exercising its
power of sale, St George could convey both the land and personal
property of SP Hotel to the Purchaser free of Perpetual and LJK's
securities.

Mortgages over the land

Under the Property Law Act 1974 (Qld), Land Title
Act 1994 (Qld) and the Land Act 1994 (Qld) it is
clear that when a mortgagee exercises its power of sale over land,
the purchaser takes the land free of the mortgagor's interest and
free of any subsequent securities. Therefore, St George was able to
convey title to the property to the Purchaser free from liability
for any subsequent mortgages on title.

Charges over personal property (the assets and
undertakings of SP Hotel)

In Queensland, there is no statutory provision relating to a
mortgagee's power of sale over personal property. The court
therefore considered the position under the general law.

In analysing the historical development of the general law
concerning the exercise of the power of sale, Justice Wilson held
that so long as the requirements of section 84 Property Law Act
1974 (Qld) were complied with, the Purchaser, upon completion
of the business sale contract, would take the assets and
undertakings of SP Hotel free from the interests of subsequent
chargees.

Section 84 Property Law Act 1974 (Qld) relates to the
exercise of the power of sale and requires the service of a notice
of default. The court held that St George served the requisite
notice of default and while describing it as "clumsily drafted"
rejected a submission that it was lacking in the description of all
the property to be sold thereby rendering it ineffective. The court
held the requirements of section 84 Property Law Act 1974
(Qld) were satisfied.

An argument was also raised as to whether Ministerial consent to
the sale, as required by the Land Act1994 (Qld),
had been obtained before the sale contracts were entered into.
Ministerial consent was required because the Hotel was situated on
land owned by the Crown and the Gold Coast City Council.
Ministerial consent was obtained but this occurred after the
exchange of contracts. It was argued that the consent had to be
obtained before the exchange of contracts. The court held, however,
that the Property Law Act 1974 (Qld) only required the
consent to be obtained by settlement, which it had been.

THE IMPLICATIONS

Property law is regulated on a State by State basis and although
the Torrens system of land regulation is a common feature
throughout Australia, not all legislation dealing with property
and, in particular, the exercise of the power of sale is identical
in each State and Territory.

The application of this decision beyond Queensland will
therefore turn on the particular legislative framework of other
jurisdictions. However in the meantime, subsequent mortgagees
should be alert to the fact that first registered
mortgagees/chargees may not require them to release subsequent
securities before proceeding to exercise their power of sale.

The Personal Property Securities Act2009
(Cth) will inevitably add a further layer of complexity to this
issue when it commences operation.